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Scarce Resource Utilization Decisio1

The document discusses scarce resource utilization decisions, which involve allocating limited resources like machine hours across products to maximize total profit. When resources are scarce, products should be ranked based on their contribution margin per unit of the scarce resource, and resources allocated to the highest-ranking products first. An example shows a company allocating its 4,000 monthly machine hours between two products based on their contribution margins per machine hour. The optimal solution is to allocate all hours to the product with the highest contribution margin per hour.

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Sherzad Durrani
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318 views

Scarce Resource Utilization Decisio1

The document discusses scarce resource utilization decisions, which involve allocating limited resources like machine hours across products to maximize total profit. When resources are scarce, products should be ranked based on their contribution margin per unit of the scarce resource, and resources allocated to the highest-ranking products first. An example shows a company allocating its 4,000 monthly machine hours between two products based on their contribution margins per machine hour. The optimal solution is to allocate all hours to the product with the highest contribution margin per hour.

Uploaded by

Sherzad Durrani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Scarce Resource Utilization Decision

Scarce resource utilization (or allocation) decision is a judgment regarding the best use of scarce resources so as to maximize the total net
income of a business. Scarcity of different resources puts constraints on the amount of product that can be produced using those resources.
For example, a business may have limited number of machine hours to utilize in production. Scarce resource allocation decision is also called
limiting factors decision.

When resources are abundant, products generating relatively higher contribution margin per unit are preferred because it leads to highest net
income. However when resources are scarce, a decision in this way is unlikely to maximize the profit. Instead the allocation of a scarce
resource to various products must be based on the contribution margin per unit of the scarce resource from each product.

A simple scarce resource allocation decision involves the following steps:

1. Calculate the contribution margin per unit of the scarce resource from each product.
2. Rank the products in the order of decreasing contribution margin per unit of scarce resource.
3. Estimate the number of units of each product which can be sold.
4. Allocate scarce resource first to the product with highest contribution margin per unit of scarce resource, then to the product with
next highest contribution margin per unit of scarce resource.

A scarce resource decision can be better explained using an example.

Example

A company has 4,000 machine hours of plant capacity per month which are to be allocated to products A and B. The following per unit figures
relate to the products:

Product A B
Sale Price $300 $240
Costs:
Direct Material 100 70
Direct Labor 65 50
Variable Overhead 20 40
Fixed Overhead 15 30
Variable Operating
40 20
Expenses
Total Costs $240 $210
Net Income $60 $30

Machine Hours Required 1.5 1.00

Assuming that the company can sell all its output, determine how many machine hours shall be allocated to each product.

Solution
Product A B
Sale Price $300 $240
− Variable Cost 225 180
CM Per Unit $75 $60
÷ Machine Hours
1.50 1.00
Required
CM Per Machine Hour $50 $60

Since the company can sell all its output, the best decision is to allocate all machine hours (i.e. scarce resource) to product B.

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